Blame Deng Xiaoping

Commentary: Beijing needs new tools to rein in markets

HONG KONG (MarketWatch) -- What next for China's frenzied stock markets? Last week's trebling of the share trading stamp duty to 0.3% triggered a 6.5% fall in Shanghai and 7.5% in Shenzhen, as a record 400 billion yuan worth of shares changed hands on Wednesday.

But unlike February, when China's stock market's tumble triggered jitters around world equity markets, this time it barely registered the rationale being what goes on in China's local markets with local money is a local problem.

While this is true to a degree, the wild card remains what policy measures Beijing comes up with next as it tries to balance a red hot economy and an equity mania that shows little sign of slowing.

In some ways it does seem rather surreal that a Communist government is faced with the problem of managing an economy where millions of ordinary citizens now 100 million with trading accounts are hooked on stock trading.

Perhaps some blame could be attributed to former paramount leader Deng Xiaoping, who almost three decades earlier declared to "get rich is glorious" as he kicked -off China's market reform program.

He did of course add the caveat that some people will have to get rich first. Such is life. Not anymore, it seems. Now everyone from noodle sellers to students to factory workers are piling their life savings or tuition fees into equities have the chance for riches.

While the governing party in China has always had to tread a fine line to pick the bits of the market economy that suited it best, it now looks like its walking a tightrope: to cool the stock market without triggering a collapse that could see millions of investors lose their hard-earned cash.

So far is seems its unlikely the stamp duty hike will be effective. The fact that China's markets immediately rebounded last week indicates the mood of speculation is still very strong among investors. This makes it more likely Beijing will need to come up with new tools to rein in the market.

Having tried politicians jawboning investors, raising both interest rates and bank reserve requirements and now hiking stamp duty, it is steadily running out of palatable options.

The worry is that having failed to take the wind out of the equity bubble earlier, tougher medicine will now be in store.

There has been talk of a capital gains tax ,but the experience in neighboring Taiwan could make that an unpopular choice. When Taiwan's government imposed a capital gains tax on share trades in 1998, the island's key stock index dropped for 19 straight days, plunging 36% from a then-high of 8,789.

Another policy being bandied around is a ban on day trading with the aim of reducing some of the speculative excesses.

One feature of the current frenzy is how the ease of online share buying has turbocharged trading activity, especially given China now has 144 million Internet users, with 97 million of them on broadband.

Apart from taking some of the more speculative day trading out of the market, increasingly there are concerns about the time individuals are spending trading stocks glued to the screens of flashing share prices.

No doubt this is fueled by stories appearing in local newspapers of workers quitting their jobs to become full time stock traders where multiples of their salaries can be made on a good day.

Then there is a new problem of getting those who stay in their jobs to do them.

One executive at a major foreign insurer in China recently told me it's nearly impossible to get its sales agents to do any work, as all they want to do is watch the market. In fact, he was hoping for a stock market correction as it might give his agents a productivity boost if they get some work done.

Some companies have reportedly given up trying to fight the urge to trade and set aside work breaks specifically for trading.

If this type of behavior is being repeated nationwide, it is likely Beijing will be concerned, making restrictions on trading activity a real possibility.

What happens then is anyone's guess, but it's likely many investors might head for the exits rather than use the time to research their stock holdings or become buy-and-hold value investors.

So the focus will be on China as further policy announcements look most likely. In the meantime, the Beijing government might also need to find a new maxim for its citizen investors to add to Deng's. Perhaps getting rich is glorious, but remember "to only invest in stocks what you can afford to lose."

Craig Stephen is a journalist and consultant based in Hong Kong, specializing in the telecommunication and media sectors in the Asia-Pacific region. He is a former business columnist for the South China Morning Post and previously worked as an equities analyst.

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